Several measures in this year’s federal budget could affect the retirement plans of seniors and near-seniors. Although some of the new rules have yet to be finalized, others will apply to this taxation year, so advisors will want to ensure clients are aware of the changes.

For 2007 and subsequent calendar years, the age at which clients must convert their RRSPs will be moved to the end of the year in which the holder turns 71; previously, it was 69. Clients who turn 70 or 71 in 2007 will be able to continue making RRSP contributions — if they have room.

But even those without earned income may have unused RRSP room being carried forward, notes Karen Wilkinson, a tax partner with accounting firm Deloitte and Touche LLP. This can be used to make further RRSP contributions.

As well, Jamie Golombek, vice president of tax and estate planning at AIM Funds Management Inc. in Toronto, says, income from rental properties counts as earned income on which an RRSP contribution can be based. He suggests opening a new RRSP or adding contributions to an existing plan.

The government is also waiving minimum RRIF withdrawal amounts for 2007 and 2008 for RRIF annuitants who turn 70 in 2007. For annuitants turning 71 in 2007, the minimum withdrawal will be waived for the 2007 taxation year. A RRIF annuitant aged 71 or younger at the end of 2007 will be able to reconvert the RRIF to an RRSP, as long as the re-established RRSP is converted to a RRIF before the end of the year in which the person turns 71.

Golombek, who chaired the taxation working group for the Investment Funds Institute of Canada, says the change to the budget recognizes that people are living — and working — longer. Under the old system, says Golombek, “People were forced to take money from their plans before they needed it.” IFIC had recommended ex-tending the RRSP maturity date to age 73 as being “more in tune with both the demographic and work trends” and as a way of providing flexibility for those who need it.

Pension income-splitting, first announced in October 2006 to calm the storm over income trusts, was also part of this year’s federal budget and will be effective beginning with 2007 income tax returns. Loris Giusto, associate partner with KPMG’s enterprise practice in Toronto, says Canadian residents will be allowed to split up to 50% of eligible pension income with spouses or partners, who must also be Canadian residents.

Tax savings come into play here. A higher-income spouse can shift income to a spouse or partner in a lower tax bracket, where it will be taxed at a lower rate. At federal and Ontario combined tax rates, the top tax rate of 46% applies to incomes of $120,000 or more, while the lowest tax rate of 21% applies to incomes of less than $37,000.

Spouses will have to elect jointly to split pension income when they file their tax returns for the year. However, splitting eligible pension income does not affect how or to whom the income is paid, so it does not involve the payer of the pension.

And only pension income eligible for the pension income credit can be split. That does not include income from old-age security or the Canada Pension Plan. However, CPP pensions can already be split by agreement between spouses or partners when both reach retirement age, although Giusto says few people take advantage of this.

Golombek describes these changes as “positive policy,” especially when a higher-income spouse is hitting the range of income subject to the OAS clawback. For 2007, individuals with incomes of more than $63,511 will lose part of their OAS benefits, while the benefit is eliminated completely when the pensioner’s net income reaches $103,101. But, he notes, under the proposed rules, registered pension plan members will be entitled to split pension income at any age, while income from RRSP annuities, RRIFs and DPSP annuities cannot be split until the recipient is 65.

Wilkinson warns, however, that clients should carefully consider a pension split. “The risk is people will do it to save taxes without thinking about other possible consequences,” she says. For instance, the lower-income spouse who takes on the tax liability may lose tax credits based on individual income, such as the age amount, the spouse or common-law partner amount, or even full OAS benefits. And, says Wilkinson, “Shifting tax liability but not assets may have unintended or unfair consequences.”

@page_break@Phased retirement, also part of the 2007 federal budget, will probably not come into effect until 2008. Current tax rules do not allow employees to accrue benefits under a defined-benefit RPP if they receive a pension from the plan. “[This] prevents employers from offering phased retirement that would permit older workers to continue working,” the government says, “while receiving a pension and accruing further pension benefits from their part-time work.”

The budget proposes to amend the Income Tax Act so employees can receive pension benefits from DB plans and simultaneously accrue further benefits, subject to certain constraints. Employers will be able to offer partial pensions of up to 60% of accrued pension benefits to employees who have reached age 55 and are eligible for an unreduced pension benefit, while allowing the employee to accrue benefits from the employment continued after he or she starts receiving the partial pension. There will be no requirement that the partial pension be based on a reduction in working time or that there be a corresponding reduction in salary.

Ottawa plans to make the necessary changes to the federal Pension Benefits Standards Act; provincial legislation may also need to be modified.

Ian Markham, director of pension innovation at Watson Wyatt Canada in Toronto and a member of Ontario’s Expert Commission on Pensions, believes few employers will take advantage of the phased retirement option. A blanket provision could mean a higher take-up than an employer would want if more staff than anticipated reduced work hours. IE